Saturday, May 3, 2014

Apple's shine starts to fade

iPad boom slows as tablets lose out to smarter phones

Between the iPad and its rivals, the tablet computer has become one of the most successful consumer electronic products ever. Apple (AAPL) has sold more than 210 million iPads since the device’s 2010 debut, about double the rate of iPhone sales in its first four years. The boom has helped the electronics industry make up for the drop in sales of desktop and laptop PCs. Suddenly, though, the market is slowing down.

Apple reported that iPad sales dropped by one-sixth last quarter from the same period a year earlier, and Microsoft (MSFT) said revenue from its Surface tablet, not robust to begin with, dropped about 40 percent after the holiday season. Amazon.com (AMZN) doesn’t break out sales, but according to researcher Gartner, it hasn’t moved up the market-share charts. Global tablet sales rose 19 percent in the first quarter, propelled by purchases of cheap models in emerging markets, but that’s paltry compared with growth of 83 percent during the same period last year and more than 100 percent during that period in 2012 and 2011, according to researcher Strategy Analytics.

The tablet’s early success has resulted in unrealistic expectations for the long term, says Horace Dediu, the founder of research and consulting firm Asymco. He’s surprised growth is slowing, because only about 40 percent of the U.S. market currently owns a tablet. For hot consumer electronics of previous generations, like color TVs and microwaves, this kind of decline in sales growth doesn’t usually happen until at least half the market has the product, he says. Tablets, Dediu adds, may ultimately prove to be more like game consoles: a large, valuable market that nonetheless cannot match the ubiquity of mobile phones. “It’s a very compelling product,” he says, “but isn’t of the same utility as a phone.”

As smartphones get bigger and do more, there are fewer good reasons for people to pony up several hundred dollars for a tablet, says Benedict Evans, an analyst and investor with the venture capital firm Andreessen Horowitz. Consumers are perfectly fine using their iPhone or Samsung Galaxy smartphone to browse the Web, play games, or scan e-mail while watching TV or lying in bed, Evans says, and that trend will likely continue as phone screens keep growing.

Demand is still growing for inexpensive tablets, notably some models from Samsung, Lenovo, and Asus, used mostly for watching video. Android tablet purchases grew 48 percent for the quarter, and grocery stores and retail chains, including Tesco (TSCO:LN) in the U.K. and Carrefour (CA:FP) in France, are selling their own branded tablets for less than $200. The gadgets, some as cheap as $50 in Asia, don’t have access to the range of apps or business software that an iPad does, but that’s not why people buy them. In Asia, Dediu says, the typical tablet user loads the device with TV shows, movies, and music: “The tablet is the TV of choice for Asia today.”

Tablets can’t easily replace PCs when it comes to crunching a lot of numbers, writing long reports, or making presentations. Jean-Louis Gassée, an Apple executive during the 1980s, says he’s frustrated by the limitations of the iPad, which doesn’t have a visible filing system that can organize and save documents. The simplicity that makes it easy for a wide audience to use, he says, limits its value for corporate customers or others who want such features. Along with many industry analysts, Gassée, now a general partner at venture capital firm Allegis Capital, says he expects Apple eventually to release an iPad that feels more like a PC.

Like Amazon and Microsoft, Apple, which generated $7.6 billion in iPad sales last quarter, declined to comment for this story. Chief Executive Officer Tim Cook, during an April 23 conference call with analysts, reiterated his belief that tablets will surpass PC sales in the next few years. He added: “Apple will be a major beneficiary of this trend.”